- A living trust can help you avoid probate.
- A living trust can help you manage your property during your lifetime if you are disabled.
- A living trust can help you keep your property private after your death.
- A living trust can help you reduce estate taxes.
- A living trust can help you make sure your property goes to the right people after your death and prevent the unintentional disinheritance of your children in the event a spouse remarries.
- A living trust almost always includes healthcare documents, a pour-over will, and end-of-life decision-making.
In some cases a will is a better option than a living trust because:
- A will is a simple, inexpensive way to ensure that your assets are distributed to whom you designate.
- A living trust is more expensive to set up than a will and takes longer to draft.
- If you are pressed for time, a will can be drafted quickly.
When it comes to estate planning, you’ve got a lot of options.
One of the most common debates is the will vs. living trust. Which one is better for you and your family? What are the pros and cons of both? Can you do both? If so, is that a good idea? In this article, we’ll help you decide which works best.
We all have a plan whether we know it or not. Even If you haven’t engaged in any planning, you have a plan.
It might be the state in which you reside or own real property that will decide who gets your assets, without you having a say. If you are unable to make decisions for yourself, a court or state agency decides what is best for you. Regardless of whether you have created a plan, there is a plan – just maybe not the one you want.
That is where the discussion of living trusts and wills comes into play. Most people would not want a state to make decisions for them and would choose to make their own decisions. The only question is how to do so. Living trusts and wills are the top ways to create a plan, even though, they are hardly equal.
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The first thing to consider is what a will and living trust actually are. A will is a legal document that outlines how you want your property and assets to be distributed after you die. A living trust, on the other hand, is a legal entity that owns your property and assets while you are alive, so it works for you even prior to your demise. When you die, the trust transfers ownership of the property to your beneficiaries. While you are alive, the trust appoints someone to act on your behalf. In fact, every living trust I have ever seen has documents for healthcare, end-of-life decisions, financial matters, gifts to be given as well as the bread and butter distribution guidelines. But that is getting ahead of ourselves, so we will remain focused on comparing wills and living trusts.
There are a few key differences between wills and living trusts. First, with a will, your property and assets must go through probate before they are distributed to your beneficiaries while a living trust can avoid probate entirely.
What is Probate? Probate is a legal process through which a will is proved in court and the executor of the will is appointed. The executor then gathers the assets of the estate, pays any debts and taxes, and distributes the balance to the beneficiaries named in the will. The probate process can be time-consuming and expensive. AARP has done studies that show the costs associated with probate for an average estate to be approximately 20% of the value of the estate with an average time frame of 18 months from start to finish.
With a living trust, however, your property and assets can be distributed to your beneficiaries without going through probate and having to incur most of the costs associated with the probate process. Moreover, because a trust does not require that assets are distributed, you can control under what conditions an heir receives distributions. Any number of conditions can be set out in the trust from age and education requirements to requirements that distributions are for certain things like health or education. Wills do not allow this level of planning and oftentimes lead to unintended consequences. Take the following example:
John and Jane are married with 3 adult kids. John passes away from an illness leaving Jane with a home and enough assets for her to comfortably live. The kids are all adults, so there are no issues for Jane other than having a nice retirement. Years go by and Jane meets someone and remarries. Years go by and Jane passes away, effectively disinheriting her children as everything goes to her new husband. Did Jane intend to disinherit her children? Probably not, yet that is exactly what happened.
This happens all the time in the U.S. and is easily avoidable with a living trust. Under a living trust, the deceased spouse’s estate could be held in trust for the benefit of the surviving spouse for life. You can even add provisions that remarriage prevents continued access to those funds or that a new spouse would need to sign off that those funds are separate property that will ultimately go to the kids. Simple enough with a trust, but impossible to do with a will.
There is no ill will or bad intent needed to cause a horrible outcome such as unintentionally disinheriting your kids. It happens because a majority of people simply do no planning. Estimates are that over 60% of the U.S. population has no plan at all in the event of their death. The numbers are even higher for people preparing for disability or prolonged illness. A living trust handles both of these issues while a will cannot.
What if John and Jane’s children were minors? What if John and Jane both passed away?
If you have minor children, a living trust can also be a good option. This is because you can appoint a trustee to manage the property for the benefit of your children until they reach certain ages. You can also designate guardians for the minor children to avoid involvement by state agencies and to ensure that your children are raised by someone you choose rather than a bureaucrat. With a will, your property would go into probate and be distributed according to the terms of the will without direction under what circumstances the children would receive funds other than the entirety of their inheritance would be payable when they reach the age of majority. You can appoint a guardian for minor children in many states and even spell out that the funds to support those kids are held in the trust to be used for things like education, support, healthcare, and similar expenses. You can still allow the kids access to the principal at specific ages or upon the occurrence of specific events. For example, you can have assets held in trust for the kids, but allow them 25% of the principal at age 25 or if they graduate from college.
A living trust is considered revocable until a grantor passes. Once a grantor passes, their wishes become irrevocable and cannot be changed. This just means that a living trust allows you to change the terms of the trust at any time during your lifetime. Once you pass, it becomes irrevocable. Both wills and living trusts can be changed during your lifetime. Living trusts can be amended with a simple amendment while a will has to be redone in its entirety as something called a codicil. Just remember that the will is not effective during your lifetime. It only takes effect upon your passing, while a living trust is effective immediately and helps with both disabilities as well as death.
One of the main disadvantages of a living trust is that it can be more expensive to set up than a will. You will need to hire an attorney to draft the trust document and fund the trust with your property. To be completely transparent, funding the trust also needs to take place, as you will need to transfer ownership of your property to the trust. While a will is something that you draft and forget. What smart practitioners do is draft a “pour-over” will as part of the living trust. What this does is name the living trust as the sole beneficiary in the will in the event the trust was not properly funded. The will “pours” the assets back into the trust, hence the term “pour-over”. In other words, you use the will and the living trust together for your benefit.
As I just stated above, one of the main advantages of a will over a living trust is that there is no funding during your lifetime because the will does not take effect until you are gone. That is both a blessing and a curse, though, because a will is no help to you or your family during your lifetime and then requires a court process that your family must navigate once you are gone. So a major disadvantage to the will is it does not do anything while you are alive and can be prohibitively expensive and time-consuming when you pass. It is for that reason that most experienced attorneys recommend trusts over wills. Wills and living trusts are apples and oranges. The best attorneys use both drafting a trust and a pour-over will to protect their clients
Even so, most people still choose to do nothing or to do a will. Why? Because doing nothing is the easiest thing to do while a will is not that far behind. One need not look further than the estates of Prince or Aretha Franklin to see just how devastating procrastination can be on an estate and its heirs. But wills are not much better. In fact, the ambiguity of a will can have equally problematic impacts. Just look at the estate matters involving Anna Nicole Smith, Jim Morrison, and Robin Williams. Because a will requires probate, these estates are laid bare for all to see as a public record and often invite fights amongst potential beneficiaries that can take years to resolve. The solution is really to keep your matter private and out of the courtrooms.
That is a major advantage of living trusts over wills. Living trusts are private while wills are public. The public cannot see the assets of the deceased, nor can they see who received them. This is a major disadvantage of wills and causes considerable strife for heirs and administrators when public information is used to harm the estate.
So, which option is best for you? It depends on your individual situation. If you want to avoid probate, control the distribution of your estate, protect against disinheriting children, and keep your estate private, then a living trust may be the best option. If you are in a rush and short of funds, a will is still better than nothing, but it is far from a complete plan.
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